In the C-Suite: Chipotle Mexican Grill’s Rise, Fall and Road to Recovery

Twenty-two years after its founding in 1993, Chipotle Mexican Grill seemed to lead a charmed life.

From a single store in Denver, the chain grew to 1,900 locations in the United States, United Kingdom, Canada, Germany and France, with more than 45,000 employees. Posting a long string of profitable quarters and growth, it became the darling of Wall Street, as the stock price climbed to more than $750 a share. Top management reaped praise and riches. Labor market research firm Glassdoor reported that founder and co-CEO Steve Ells received $29 million in 2014 alone.

Customers poured into the restaurants in droves, many of them attracted to Chipotle’s marketing themes, which promoted itself as a fresher and healthier alternative to other fast food restaurants. The company slogan was “Food With Integrity,” and it boasted “naturally raised meats,” “organic ingredients” and “locally sourced” products.

The “healthy and safe” perceptions became fixed in customers’ minds. However, Chipotle’s food wasn’t always safe or necessarily healthy. For instance, in March and April 2008, more than 20 people who dined at a Chipotle in La Mesa, Calif., reportedly developed hepatitis A. In 2009, officials traced an outbreak of E. coli that sickened 29 customers in Colorado, Utah and New York to Chipotle’s iceberg lettuce.

On the health front, food experts pointed out that the high fat and salt content in the company’s products was hardly conducive to good health. In 2003, a report from the Center for Science in the Public Interest said Chipotle’s burritos contained more than 1,000 calories, nearly twice what a normal meal should contain. Due to the high caloric and sodium content, MSNBC Health put the burritos on its list of “The 20 Worst Foods in America.”

But diners paid little attention, and the company rolled along to ever-increasing growth and profits.

A turn for the worse

Things began to turn in the second half of 2015.

In August, 234 customers and employees contracted norovirus at a Chipotle restaurant in Simi Valley, Calif. And in August and September, 64 people became sick with salmonella at 22 stores in Minnesota. Nine had to be hospitalized.

In October, 52 people in nine states fell victim to E. coli and forced the company to temporarily close all 43 of its restaurants in Washington and Oregon. And in November, 140 Boston College students became sick from norovirus after eating at a nearby Chipotle.

The company was slow to react to the evolving problem, and the Simi Valley, Calif., incident should have been a wake-up call. Health officials said the chain didn’t even report it until after the outbreak was over and the store had been sanitized. Until December, none of the subsequent incidents appear to have resulted in any action to carefully examine safety processes or policy.

Did the PR team not warn top management of the danger of failing to examine safety policies across the chain and institute fixes? Or did the leadership receive and ignore such warnings? Too many companies consider public relations as a marketing function and ignore the value of PR professionals as knowledgeable advisers. As a consequence, they fail to take actions that could prevent or mitigate a crisis.

By early December, the chain had a full-blown catastrophe on its hands. Almost 500 people across the country had reported becoming ill from Chipotle food in a three-month period. But those figures reflect solely the number of people who went to a doctor or hospital and were properly diagnosed. In fact, food safety experts say they believe the number of people actually affected in any such outbreak is about 10 times the reported number.

By this time, the critics came out in force. In an opinion piece published by Forbes on Dec. 14, Henry Miller, a medical researcher and founding director of the FDA’s Office of Biotechnology, described food poisoning outbreaks as “something of a Chipotle trademark” and called the “fresh versus frozen dichotomy nothing but a snow job.”

The company’s failure to respond quickly and effectively at an early stage had a tremendous impact. According to published reports, Chipotle’s stock lost a whopping 30 percent of its value, while its net income plummeted 44 percent in the fourth quarter of 2015.

Crisis response hits and misses

A key principle of crisis response is to not compound your problems by minimizing the situation or trying to play the victim. But that’s exactly what CFO Jack Hartung did in an investor call in early December.

He chastised the CDC for announcing cases in the Northwest one at a time rather than reporting them all at once, and said the policy had prompted “the media to fan the hysteria.”

Hartung dug himself into a deeper hole when he commented, “Because the media likes [sic] to write sensational headlines, we can probably see when somebody sneezes that they’re going to say, ‘Ah, it’s E. coli from Chipotle.’”

While Hartung chose to single out the mainstream media, there was probably more harm done on social media as bloggers and tweeters unloaded on the company. The dialogue on social media tends to be less polite and balanced than that in mainstream media, and once an item goes viral, it will reach millions.

Part of the plan was to close all of the chain’s restaurants for four hours on Feb. 8 for a national safety discussion. More than 50,000 employees in 400 locations were tuned in via satellite. While the contents of the session were not made public, one would have to assume that hand washing was a major topic, as well as sending sick employees home, which would have addressed two of the major factors blamed for the contamination outbreak.

The company also offered complimentary food on Feb. 8. Chipotle officials said that 5.3 million people downloaded the mobile coupon for a free entree offered as a rain check for when the locations were closed.

From local to national

There is always collateral damage from any crisis. Critics, journalists and opportunistic lawyers, among others, start digging for other problems, and things that would normally constitute a small local story become national.

Here’s a good example. Three female managers at Chipotle sued and won a case in Cincinnati for sexual discrimination, saying they were let go in spite of good performance reviews and replaced by men. Normally that’s a second-tier local story. However, it got national coverage because Chipotle was already in the news. Once a company gets a bad reputation, any negative story will blow up.

Chipotle had a number of food-safety failures over the years, but because they were localized incidents, they drew limited national coverage. That will not happen again for a long time, and every problem that crops up now will get plenty of attention. Chipotle’s issue today is neither small nor local; it’s systemic.

The road to recovery

Rebuilding the public’s trust is going to take time. In early March, a survey by investment company William Blair & Co. described the current outlook for Chipotle as “slowly but steadily improving.” While 80 percent of the 800 people the company surveyed said they’re still fully aware of Chipotle’s food-safety issues, people are cautiously returning, helped in part by the millions of coupons that the company mailed to customers in March.

Still, analysts now predict it’ll be lucky if sales have rebounded by 2018 from the company’s food-safety disaster. If that weren’t bad enough, investment firm Wedbush Securities said in a March 29 research note that even then, the chain might not be profitable like it was back in its glory days. In addition, even if Chipotle’s sales rebound by 2018, the company still faces higher operating costs from its expanded food-safety measures.

Here are several lessons from Chipotle that any organization can implement into its crisis management plan:

Look carefully at localized problems to determine if they signal something wider.

Include PR professionals in all discussions of negative developments to consider potential ramifications.

Don’t blame the government or the news media for your problems.

Virgil Scudder is the author of “World Class Communication: How Great CEOs Win With the Public, Shareholders, Employees, and the Media,” which received an Award of Distinction as one of the best business books of 2012. Email: virgil@virgilscudder.com.

Comments

Jim Lukaszewski says:

The Chipotle experience, as Virgil so carefully outlines, reflects the usual pattern of crisis response even in companies with the smartest leaders.
In additional to Virgil's sensible advice I would add a warning: String brands generally withstand even the most ham handed responses. . .the first time. This is the true test of brand power.
What is often forgotten is that even the legendary Tylenol response (circa 1982, was tested a second time in 1986 with poisonings in New York and the second time around the company lost market share and was forces to exit the capsule business for 25 years.
Great brands have great survivability the first time. The second time not so much. Listen to Virgil. Get ready now.

May 2, 2016

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